Automotive Aftermarket

The changing aftermarket game- and how automotive suppliers can benefit from arising opportunities “McKinsey & Company 2017”

This review by McKinsey & Company explores and highlights the geographical and technological developments that are expected to disrupt the automotive aftermarket (spare parts) over the next 5 to 10 years. This is a rapidly changing environment and has opened up many opportunities for change within the automotive industry.

In the past five years, the overall automotive aftermarket has profitable growth and it is expected to continue, with the aftermarket increasing to approximately EUR 1,200 bn by 2030 with an underlying global growth rate of roughly 3% p.a.

Growth is expected to change in 3 distinct ways:

1.Region → China primary driver 8.1% p.a, while Europe and North America will contribute at around 1.5%

2.Business model → shift towards direct distribution models and movement to partnerships
3.Products and services → movement to digital with digital-related revenues expected to triple to a share in sales of almost 20%.

Aftermarket executives indicated that currently about half of revenues comes from wear-and-tear parts, followed by crash-relevant parts, diagnostics products, services, and other parts. It is expected that the growth of wear-and-tear parts will begin to slow due to increasing part quality, e-mobility, and price pressure. Crash rates are also likely to decrease as a result of enhanced safety. Although the higher use of sensors might increase the average cost of each single crash, in sum a decrease is expected.

Instead, growth will come from diagnostics and services as new offerings emerge, many of which are linked to digitization and car data. Growth rates in available data are expected to be approximately 3 percentage points above the average for the aftermarket as a whole. Digital-driven products and services expect that their share aftermarket revenue will increase by a factor of 3, from currently 6% to almost 20% within the next 10 years.

Automotive suppliers are expected to see consolidation among part distributors, digitalisation of channels and interfaces, and access to car-generated data (diagnostics and movement to sensors). Many automotive companies not prepared for the change due to lack of strategic focus and lack of digital resources. New technologies and major shifts in the aftermarket industry will be game-changing factors that all players have to react to now in order to maintain strong positions in the future

In order to fully benefit from the rising opportunities of the aftermarket landscape, automotive suppliers will need to assess the likely impact of these disruptive trends on their business, and will need to understand the most probable future industry scenarios, whether there are multiple player categories that are likely to benefit or if on player types, such as a distributor, dominates the aftermarket trajectory.

Companies would need to consider their strategies moving forward, the shape their presence within the market, their partnership possibilities, and the tools that will allow them to deepen their relationships with customers. This will reshape the way customers, automotive suppliers, and other aftermarket companies think of cars and driving and how business in the automotive aftermarket is conducted and value is created.

Background into the aftermarket

The aftermarket is specifically the market for spare parts, accessories, and components for motor vehicles. The service business (maintenance and repair of vehicles) generates about 45% of total aftermarket revenues in Europe, while retail and wholesale of vehicle parts make up the remaining around 55%.

Within the aftermarket environment, new players are beginning to enter the automotive market and established companies have been changing their business models – a trend that is expected to continue in the future. When it comes to consumer preferences, young generations are less interested in car ownership while stricter regulations on emissions are giving rise to electric vehicles. Also the use of smartphones has enabled new mobility services such as e-hailing, while a substantial share of car-related information search and purchases has moved online.

Top disruptive trends among parts distributors

Consolidation among parts distributors
As the aftermarket continues to mature more consolidation is expected, mainly coming from the parts distributors that need to reach critical mass and leverage economies of scale.

Original equipment manufacturer’s (OEMs) could expand aggressively in aftermarket activities, dominating the market.

Digitalisation of channels and interfaces
This allows for substantial improvement in the value chain, however both suppliers and distributors will have to work together

Access to car-generated data
Improvements made to data mining has meant that aftermarket experts expect big data and analytics to become an indispensable asset in the future allowing for deeper customer insight, operational efficiency, and the opportunity for sophisticated sensors to run diagnostics on equipment.

The 3 Aftermarket scenarios for the future

Extreme: Distributors take over by expanding aggressively

Balanced: A balanced, digital aftermarket world where many players benefit from the digitalization as processes and customer interfaces become fully digital

Extreme: OEMs expand activities and gain market power driven by data and conquer the aftermarket